Short Sale Process for Buying a House Before Foreclosure

Short sales are distress sales in which the lender agrees to accept less than is owned on the house. Also known as preforeclosure sales, they accounted for about one-quarter of homes sold in early 2012, surpassing foreclosures, or real estate owned by lenders. A buyer in the market for a short sale must understand the process, as it can take much longer to complete and the sales terms involved differ from traditional and foreclosure sales. A short sale takes place in the preforeclosure stage, after default.

The Basics

Lender involvement in the real estate transaction is the main feature that makes short sales different. Unlike a foreclosure sale, in which the property has already undergone bank repossession, a short sale home is typically occupied by the homeowner, who is usually experiencing financial hardship. While the homeowner is the seller, he must also get his lender to agree to a sale of the home for less than the amount owed on the loan balance.

The Process

A short sale requires the lender to process a hardship package in which the seller provides a written statement, or hardship letter; a financial statement of monthly debts and living costs; income and asset information; and proof of financial hardship, such as medical bills or a divorce decree. The seller may submit the package before marketing the home for sale with a real estate broker, or once he has received an offer to purchase. Typically, the process for the buyer is shorter when the seller submits a package before he receives an offer.

Valuation

A short sale is particularly challenging because lenders try to get as much money as possible from the transaction, the Los Angeles Times says. Even though a failed deal ultimately results in the property being foreclosed on, the lender has a bottom line for a short sale. To help determine it, the lender orders an appraisal of the home to find out its condition, comparable sales activity and the amount the home can reasonably be expected to fetch in the current market. The appraisal is ordered within weeks of the hardship package or offer to purchase, whichever is first.

Terms

A lender provides approval of the short sale with certain conditions that the buyer and seller must meet to complete the transaction and to have the lender forgive the debt. The lender requires the transaction to be completed by a specific date. A delay in closing might cause the short sale to be rejected. The lender requires a minimum amount of funds, or net proceeds due to the seller, in this case, the lender. The lender also requires that all parties confirm that they all work independently of one another, with their own interests in mind. An arm's-length affidavit helps ensure that the buyer and seller are not colluding to defraud the lender.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.

C., Karina. (n.d.). Short Sale Process for Buying a House Before Foreclosure. Home Guides | SF Gate. Retrieved from http://homeguides.sfgate.com/short-sale-process-buying-house-before-foreclosure-49459.html

C., Karina. "Short Sale Process for Buying a House Before Foreclosure" accessed May 25, 2019. http://homeguides.sfgate.com/short-sale-process-buying-house-before-foreclosure-49459.html

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